Single Factors Summary
Here are the main points for the one-factor tests:
- Valuation factors have a strong predictive power to achieve market outperformance.
- The mid-cap companies seem to outperform the small-cap and large-cap companies except for the results of the ERP5 rank.
- The fact that a company generates a high return on invested capital does not make it a market-beating investment; valuation is more important.
- Investing in companies with a good F-score, which suggests improving fundamentals, results in market-beating returns.
- Winners continue to win, and losers continue to lose, as shown in our test using 6-month price index and 12-month price index.
In the following table, we show how all the single factors we tested met our criteria of being classified as strong factors.
As a reminder, this is how we defined a strong factor:
- The top quintile (Q1) outperforms the bottom quintile (Q5), and
- There must be a linearity of returns among the quintiles (quintile one must outperform quintile 2, which must outperform quintile 3, up to quintile 5), and
- The strategy must also consistently outperform the market over time. We defined consistent outperformance when the first quintile (Q1) outperformed the market portfolio 60% or more of the time.
If you only looked at the first quintile of every single factor we tested, this detailed the two best and worse strategies for each market size group of companies: